News Flash: The Credit Cycle Turn is NOT All About Oil

Wall Street threw quite a party earlier this week. Stock averages pushed up to the top of their recent range, in large part propelled by crude oil and energy stocks.

That rally, in turn, stemmed from optimism that Russia and Saudi Arabia will reach a consensus on an oil-production freeze at this weekend’s meeting in Doha, Qatar. There is also some talk floating around about improved Chinese demand, due to yet another round of government stimulus, and about gradually declining global production.

So should you jump on the bandwagon and throw caution to the wind? I don’t think so. Because the major negative turns in the credit and economic cycles that began last summer don’t just stem from the meltdown in the energy sector. Far from it.

Instead, the easy-money cycle from 2009 to 2015 inflated a wide-ranging round of bubbles in many, many assets. It also incentivized massive malinvestment and crazy corporate behavior, from the biggest boom in M&A ever … to a record surge in debt-funded stock buybacks … to junky IPOs of wildly overvalued technology-sector "unicorns" … and more. The implications for you?

First, even if oil prices continue to stabilize, it won’t have any impact on the deflating value of tech unicorns. For instance, the Financial Times just reported that valuations are plunging for many private companies around Silicon Valley as the money flood dries up.

Investors, including hedge and mutual funds, sank money in 25% fewer companies and committed 40% fewer dollars when they financed tech startups in the fourth quarter of 2015 than they did just one quarter earlier. That’s fueling a surge in layoffs, and prompting a flood of office space to hit the subleasing market.

Even if oil prices continue to stabilize, it won’t do any favors for the deflating commercial real estate market.

Second, even if oil prices continue to stabilize, it won’t do any favors for the deflating commercial real estate market. The Wall Street Journal reported just this week that one of the most visible of New York’s "super-rich towers" is in big trouble. Specifically, the developer of the luxury One57 tower in midtown Manhattan has been forced to give up on a plan to lease 38 unsold units as apartments.

It already failed in an effort to lease units on one floor last year. It also failed in another attempt to sell all 38 units in one bundle in the fall. Now it’s going to attempt to sell the units as condos that start at $3.45 million … undercutting prices of previously sold units. That’s just the latest of many signs that the real estate bubble is beginning to leak air.

Third, even if oil prices continue to stabilize, it won’t help the deteriorating auto sector. Consider how dealers are now starting to lease many more USED cars in addition to NEW ones. That’s designed to make older vehicles more affordable to cash-strapped buyers than they would be with standard, used-car loans. But it’s something you rarely see on older vehicles, at least not at these volumes.

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Why would dealers resort to that step? Because the auto bubble is also bursting. A record number of off-lease and other used cars are starting to flood the market in a wave that’s forecast to get bigger each year through 2018.

Sales also missed forecasts by a country mile in March, and Manheim Consulting reported that used-car prices just fell for the third month in a row. Result: You can expect new-car manufacturers to resort to even-larger, profit-crushing incentives as industry conditions deteriorate.

So sure, the energy market caught a break here. But does that mean the world’s credit concerns are cured? That it’s all rainbows and unicorns from here on out? No way!

Even if the oil and gas crisis were to be solved overnight, it wouldn’t help fix any of those other problems. That has major implications for your investing strategies. So make sure you catch my new, blockbuster documentary "The Unseen Hand" for more details.

Until next time,

Mike Larson

Recommended Articles by Mike Larson:

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

{23 comments }

William LukasFriday, April 15, 2016 at 7:59 am

How do I get rid of the oversized social media links on the left side your screens. You have placed it in the way of the articles we are trying to read. it cuts off the first 2.5 characters of 17 lines of text.

Bonnie EFriday, April 15, 2016 at 5:27 pm

William: Same aggravations here….go over with you mouse to just underneath those links you speak of, and a little left-arrow appears. Click on that and it should make that stuff recede back into the margin.

BILL BENTLEYFriday, April 15, 2016 at 8:01 am

Please increase your font size, Mike; great work!

Friday, April 15, 2016 at 4:21 pm

you can easily zoom your own font size. my computer it is hold ctrl key and roll the mouse wheel or pust the + key.

Solly RFriday, April 15, 2016 at 8:06 am

While it is TRUE that there are many economic and political problems lurking in the near future, it appears to me that Investors have to adopt a “go with the flow” attitude. Fundamentals , debt, politics, central bank policy, are all considerations of a logical person. The Market is NOT logical. Current investors are buying on dips and selling in rallies and it’s working for now. Foreign money is still flowing in and Big Money Funds, want to trade and profit, so the Market is ebbing and flowing almost day to day. I feel that between now and Mid May the fluctuations will continue so profits will be made day to day and week to week. After that there may be a period of settling to lows until after Summer when activity will fluctuate again gravitating upward then settling around year end. This is my theory based on a few factors. I have been right most of the year I got out in November and recently came back in. There is no crystal ball you have to go with your gut and hope/pray for the best. But like the columnist says, be weary of the impending challenges.

WillFriday, April 15, 2016 at 1:18 pm

Solly R, and might I add: Be wary of a market that is NOT logical.

HowardSunday, April 17, 2016 at 10:29 pm

Solly R

I am buying in dips and selling in rallies. What is of increasing concern to me is the protection of capital. Our collective leaders can’t manage the economies they are trying to control. I’m back in cash and may stay there for a while. I don’t trust this market anymore than a week at a time.

Ernie DeedsFriday, April 15, 2016 at 8:09 am

Have a bad hearing defect & cannot hear the videos presented. How about a transcript so I can get the best of what you offer.
Thnxxx,
Ernie Deeds

anthony gFriday, April 15, 2016 at 8:27 am

To much of the wrong medicine . The real economy is failing. The artificial prosperity has benefited only the one percent.

anthony gFriday, April 15, 2016 at 8:37 am

Nature will win at some point.

anthony gFriday, April 15, 2016 at 8:53 am

the pensions are failing and the artificial low rates are the culprit.

angela kwokFriday, April 15, 2016 at 8:57 am

Thank you Mike for providing such insightful & informative comments on the current market situation in such a precise style. (Angela from Hong Kong)

Lifestudent38Friday, April 15, 2016 at 9:43 am

Oil is a fixed price commodity and as such has bearing only on the pockets of consumers and businesses. The build up in inventory of especially auto’s is troublesome to say in the least!

anthony gFriday, April 15, 2016 at 9:55 am

overbought conditions in the market have become even more overbought. I am sure the negative email is coming in. The market should close to a correction.

F151Friday, April 15, 2016 at 10:14 am

The faltering of the NYC towers does not surprise me. It is an interesting fact that most of the significant skyscrapers in the U.S. have been built near the end of a bull run or recovery when social mood was elevated (no pun intended) and building big and tall was a part of the ebullient spirit contained therein. Empire State Building, Twin Towers, Sears Bldg…

Ted FFriday, April 15, 2016 at 10:36 am

I live in the Oakland Bay Area. The car lots at dealers are full of 2013 & 14 used cars even while pushing 2016 model leases. And the number of car ads on TV is way up as are the incentives, zero per cent financing, cash rebates up to 15% of the MSRP on Chevies. The Bay Area housing market is cooling down, sales and prices down. The median price in San Francisco is dropping below a million bucks and there are thousands of units under construction, mostly condos and apartments. Is the tech sector in for another drop? They lured thousands of other staters into California, now some are leaving.

WillFriday, April 15, 2016 at 1:22 pm

Good comments Mike at a very pertinent time.

Friday, April 15, 2016 at 4:24 pm

so what you’re saying is i should sell the rally? i’m up about 10% from the 1881 s&p level where i bought.

badger 10Friday, April 15, 2016 at 5:26 pm

I think the best comments I have heard from an economist’s is “this economy is built on a mountain of debt. ” Think about that comment!

JFWSaturday, April 16, 2016 at 8:40 am

Mike Its time that you speak to the FNMA and Freddiemac appeal that is in the court system now. The hedge funds lost in DesMoines Iowa Federal court. so its on appeal now. Since Fnma and Freddie have 6.46 Trillion mortgages insured. That’s huge. Do you think that the Federal Gov. should be taking the profits now? The Feds did bail them out.

johnSunday, April 17, 2016 at 2:56 am

dear Mike ,

pls tell me : when will the Dow Jones crash to 14.000 ?

I wish it crash immediately , the sooner the better .

I just can’t wait to see it happen .

Whoever can help to make it crash in May or June 2016 ,
I will be his follower and subscriber for life .

tq

Greg RMonday, April 18, 2016 at 9:17 pm

Do you really think the market will fall this year?
with the presidential election on and all the big players in the market and the way they seem to be manipulating the market, I believe we will not see a true correction until the early part of next year when we will know who is in power and what there policies will be.
I think that the greater part of this year will be all hot air and you can see so far this year the markets are not normal on its normal valuations.
Also with the state of the EU and their negative interest rates is going to be good upside for the US stocks as their is no where for the mass of money that needs a home and the poor value of the bond markets, where else to put the cash.

What do you think.

StuFriday, July 15, 2016 at 6:21 pm

Nothing makes sense any more. If money pours into stocks the prices will be driven so far beyond a realistic value that there has to be a serious correction. Trying to take advantage of the blip in stock prices Just hope greed doesn’t get in the way and I hang on too long. On second thought I think I’ll sell Monday morning